As bombs continue to fall on Ukraine, one of the world’s largest wheat suppliers, could food shortages soon follow?
Workers clean the floor as sacks of food earmarked for the Tigray and Afar regions sits in piles in a warehouse of the World Food Programme (WFP) in Semera, Ethiopia in February 2022. The aid agency Oxfam International warned in March 2022 that widespread hunger across East Africa could become “a catastrophe”.
Photo: picture alliance / ASSOCIATED PRESS | Uncredited
The Rapid Response Forum of the G20 Agricultural Market Information System (AMIS), designed to react quickly to threatening developments on world agricultural markets, was founded ten years ago.Now on high alert, it held an extraordinary meeting for the first time on 5 March. Russia and Ukraine also attended, and all agreed to continue exchanging reliable agricultural market data and avoid disruptions in international agricultural trade.
AMIS is supposed to provide reliable data, which is exactly why it was founded after the food crisis in 2008. The availability of empirical real-time data on the level of global food stocks is especially important during moments of crisis, not only for predicting price spikes, but also for assessing the functioning of agricultural markets and how supply shortages can be managed.
At the moment, however, much of the available data is far from reliable, as hardly any country conducts empirical, comprehensive surveys of grain stocks. Beyond a few notable exceptions like the Philippines and the US, few countries conduct them partially, while others like the EU don’t conduct them at all, making it practically impossible for AMIS to fulfil its mandate.
Dependence on the World Grain Market Aggravates the Crisis
Cereals are largely grown in the countries where they are consumed. Ninety-one percent of rice, for example, is produced where it is consumed. The figure for maize is 84 percent, while for wheat it is 73 percent. Nevertheless, since the 2008 food crisis — which drastically demonstrated the dependence of many countries on the world market — the share of grains traded on the international market has continued to rise.
All countries that import grain are increasingly dependent on a handful of exporting countries, five of which account for 70 percent of wheat exports. Four countries cover 85 percent of global maize exports. The share of Russia and Ukraine in global exports is 26 percent for wheat and 16 percent for maize.
This dependence on a few exporting countries is fatal. Crop losses arising from an array of factors including, but not limited to, extreme weather conditions, armed conflicts, supply chain breakdown, and politically mandated blending quotas for agro-fuels derived from cereal crops have the potential to diminish exports and increase the risk of global food shortages.
Every crisis is different, but every crisis shows how life-threatening dependence on the world market can be. This reality is also felt by the highly indebted governments of African countries. The countries of East Africa — Ethiopia, Somalia, Kenya, South Sudan — import up to 90 percent of their wheat from Ukraine and Russia. Up to 28 million people are already at risk of extreme hunger in East Africa — rising grain prices will only exacerbate this risk. In other countries such as Egypt, Algeria, Tanzania, and Pakistan, high wheat prices mean that less is being imported than usual. This tightens supply and causes prices to rise.
Is the Global Grain Supply at Risk?
When it comes to gauging the risk of global food shortages, the prevailing levels of available grain stocks are of key importance. Their release can cushion poor harvests in other countries and the loss of exports. The good news is that, assuming that current data is correct, global stocks of wheat and maize are abundant. The ratio of global stocks to global consumption (known as the “stock-to-use ratio”) is currently 35 percent for wheat, far above the critical limit of just under 20 percent. Even if the stocks of Russia and Ukraine are excluded, this figure is still 28 percent in the main exporting countries.
Some experts refer to the ratio of stock levels in major exporting countries to their consumption and exports (the “stock-to-disappearance ratio”). This means that exports are implicitly regarded as unsecured and China’s stocks, for which data are often considered insecure, are not taken into account. As far as wheat is concerned, the current value is close to the critical limit of 13 percent. When these values decline, prices rise or price fluctuations increase. Overall, the current stock situation is not yet worrying. There is still enough grain, but it is expensive.
Assessing future price developments, on the other hand, is associated with considerably more uncertainty. For example, the lockdown in Shanghai is currently causing oil prices to decline, but for how long? If there are no further crop or export failures and oil or energy prices do not jump again, it can be assumed that prices will settle at the current level in the 2021–2022 marketing year.
For 2022–2023, price developments will depend on how other exporting countries, farmers, and economic actors behave. Initial indications suggest that there will be adjustments. India wants to export more wheat, while the fertilizer company Nutrien wants to expand its potash production capacities. Due to the drought, export declines are expected for winter wheat in the US, but not for maize and soybeans. Agricultural experts currently estimate that global grain production will be at least 10 million tonnes lower in 2022, meaning that stocks will also fall. This, in turn, means that the supply situation will deteriorate.
What Impacts Food Prices?
Cereal prices have been rising since early 2020, with the Food and Agriculture Organization of the United Nations (FAO) food price index exceeding 100 since October 2020. By December 2021, the index was as high as it was in March 2008, and reached a new high in February 2022. The main price drivers were the increased prices for vegetable oils and milk. In the case of vegetable oils, the meagre soybean harvest in South America, harvest problems with palm oil in Malaysia, and the sharp increase in the use of palm and soybean oil for diesel production from agricultural commodities caused prices to rise.
The outbreak of the Ukraine conflict compounded these existing pressures on commodity prices. Several days after the war began, prices for wheat on the Chicago Stock Exchange had risen by 50 percent. Price fluctuations for both oil and grain and high. After the negotiations between Russia and Ukraine that took place on 29 March, the price of wheat fell again.
The behaviour of financial speculators is largely determined by expectations and concerns about possible supply shortages. Steve Suppan of the Institute for Agriculture and Trade Policy (IATP) observes that excessive speculation on the stock exchanges is driving up wheat prices in the US. For Suppan, the data of the US supervisory authority, the Commodity Futures Trading Commission (CFTC), are no longer meaningful since former President Trump weakened the rules for limiting food speculation in October 2020. The caps are now higher and the exchanges can now decide for themselves which futures they count towards the caps (so-called “position limits”).
According to Suppan, the notion of excessive speculation is supported by the fact that the wheat price at the end of the forward contract period is not at the level of the cash price. Agricultural traders profit from price fluctuations and can earn a lot of money. However, due to high margin calls, they now have to raise new capital to keep business going. A further concentration of agricultural commodity traders could be the result.
Every price crisis shows that “food first” is a pious hope in times of crisis. The demand for vegetable oils for agro-diesel is driving up prices. Ethanol producers in the EU are desperate for grain. Livestock numbers cannot easily be reduced in the short term. The political failure to re-orient the livestock sector, to move away from petroleum-based agriculture and agro-fuel policies, and to regulate commodity futures markets is fuelling competition between plate, trough, and tank and food price volatility.
When food prices rise sharply, people in (extreme) poverty are hit particularly hard. In Somalia, prices for basic foodstuffs are more than twice as high as last year. In Kenya, half of all households have to borrow food or buy it on credit.
Official data on local price trends often refer to wholesale prices rather than retail prices. People believe that food retailers can and do raise prices regardless of underlying costs. The power imbalance in the grocery chain contributes to “asymmetries in price transmission”. That is, domestic prices rise when there are external shocks, but they do not fall immediately when the situation eases. Profits are siphoned off by the food trade.
What Is to Be Done?
The question is not whether there is a global food crisis, but rather to what extent it is worsening. Hunger figures have been rising since 2014, with around 811 million people currently going hungry worldwide.
Yet policymakers remain largely indifferent to these figures as long as there is no threat of unrest and uprisings. There was no extraordinary meeting of the UN Committee on World Food Security (CFS) during the COVID-19 crisis, although the situation was devastating. The UN Food Systems Summit (UNFSS) in September 2021 also clearly missed the target when it came to initiating the long overdue turnaround towards a transformation of food systems.
Due to COVID, an additional 320 million people could not afford healthy food in 2020. The total number is somewhere in the range of 2.37 billion people — 30 percent of the world’s population! Instead of promoting agro-ecological approaches, the EU follows the agricultural lobby in freeing up ecological priority areas for cultivation and providing aid for the production of mineral fertilizer.
In order to prevent the crisis from worsening, the following priorities must be established:
- Save lives now: Donor governments should provide new funding for humanitarian aid and food security appeals worldwide.
- The UN Committee on World Food Security should convene an extraordinary meeting on the food situation: Governments represented on the Committee should lobby in Rome for an extraordinary meeting of the CFS to be held on the food situation.
- Ensure universal social protection: To ensure access to adequate and sufficient food for all, rights-based universal social protection systems are essential. Donor governments should advocate for a global social security fund.
- Transform food systems towards agro-ecology: Governments should promote resilient food systems by supporting agro-ecological approaches, including the development of local and regional food supply chains. A shift away from oil-based agriculture is more urgent now than ever before. This means promoting more biodiversity above and below ground, the cultivation of nitrogen-fixing protein crops (legumes), agroforestry systems, and the use of bio-fertilizers. At the EU level, the farm-to-fork strategy should be pushed forward.
Marita Wiggerthale is a Senior Policy Advisor on world food and global agriculture at Oxfam Germany. This article originally appeared on the Oxfam Germany blog. Translated by Jan Urhahn.